Joy at Work. Dennis W. Bakke
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hard on training programs. The job security mentioned in the letter was needed to get to the bottom of a troubling situation, and in that sense it was an exception to my larger opposition to guaranteeing indefinite employment. Here are excerpts from our letter:
Dear Shareholders and People of AES:
Some disappointing news has just come to our attention which, consistent with our values, we felt we should share with you at the earliest opportunity. On Thursday, June 18, we notified the Environmental Protection Administration (EPA) and the State of Oklahoma that we had discovered in an internal review that some water discharge reports have been falsified at the AES Shady Point Plant in Oklahoma.
It appears that no one in the management structure outside of the water treatment area was aware of these violations. The people involved say that they falsified the samples because they feared for their jobs if they reported a violation. Yet no one at AES has ever lost his or her job for telling the truth, nor will they ever, as long as we have anything to say about it.
This answer is hard to understand because these were the sort of minor excursions to be expected during the first year of operation of a new plant. Since discovering violations, we have adjusted operating procedures and are adding new equipment so that it should be highly unlikely for such exceedences to occur in the future.
What disappoints us most is that no one mentions these violations in either of the two confidential and anonymous values surveys that were conducted at Shady Point during the time this was going on.
This action raises serious questions in our minds about our performance relative to our values. One of the founding tenets of this Company is the shared values. We thought we had explained our values enough to everyone in AES that this sort of thing could never happen here. We are trying to treat people like adults, trusting in their honesty, judgment, maturity, and professionalism—rather than relying on detailed procedures, manuals, and minute supervisory oversight. We cannot comprehend why anyone would trade our integrity to make our environmental performance look better. We hope that the steps we have taken today address the problem, but are embarrassed and disappointed and angry that this could have happened in AES.
The letter was leaked to the press, and we quickly learned how candor can be misconstrued by the investing public. We were a young publicly traded company at the time, and many investors assumed that the misconduct at Shady Point was an economic disaster. In fact, it would bring nothing more than a small EPA fine because no damage had been done to the environment. Nonetheless, our stock price dropped 40 percent the day the letter was leaked. The precipitous fall was on top of the previous month’s 20 percent decline from problems we were having in Florida, where a neighborhood group was mounting an effective challenge to our building permits, even though we had already begun construction on a new plant.
Before the stock plummeted, key board members and senior officers were seriously but constructively concerned about the incident. We started to investigate what happened and how. Roger and I circulated our letter. Beyond thinking about discipline and rehabilitation for those directly involved, we began asking what we could do better in hiring, leadership, and education to minimize the chances of something like this happening again.
After the stock price dropped, the nature of our response changed dramatically. We became panicky, and our emphasis shifted from disclosure to damage control. Much of our attention turned to reassuring our shareholders. A host of lawyers descended on the plant “to protect the assets.”
It seemed to me that most of our leaders, especially board members, were more concerned about the drop in stock price than the breach in our values. One of the lawyers’ first suggestions was to fire all nine of the people involved. When I asked why, he responded, “They will go easier on you at the Environmental Protection Agency.” From my perspective, that was an unacceptable reason for dismissing an employee. Rightly or wrongly, I decided that no one would be fired if he admitted wrongdoing, accepted his punishment, and pledged to adhere to AES values in the future. Under these conditions, seven of nine offending employees left the company one way or another within one year.
Several of our most senior people and board members raised the possibility that our approach to operations was a major part of the problem. It was as if the entire company were on the verge of ruin. They jumped to the conclusion that our radical decentralization, lack of organizational layers, and unorthodox operating style had caused “economic” collapse. There was, of course, no real economic collapse. Only the stock price had declined. In addition, one of our senior vice presidents did a presentation for the board suggesting that “Protect Our Assets” rather than “Serving Electrical Needs” should be the top goal of the company. What he meant was that we should follow a defensive strategy, led by a phalanx of lawyers, in order to avoid legal, environmental, and regulatory wrangles. There was also discussion of adding a new layer of operating vice presidents between me and the five plant managers we had at the time. A meeting of the company’s 13 top managers was convened when I was out of town. At the meeting, a senior officer of the company suggested that our outside counsel should be made vice chairman of the company, with authority over me when “compliance” issues were involved. The officers group took a straw vote that showed 11 in favor of the new organizational ideas and only two against.
Bill Arnold phoned me again about a month after all this trouble began. He asked me not to visit the Oklahoma plant anymore. Under pressure from lawyers and because of an understandable loss of confidence, the plant had decided to return to a “proven” approach to running industrial facilities. Back came shift supervisors, an assistant plant manager, and a new environmental staff department reporting to the plant manager (to make sure water treatment employees did the right thing). These steps increased our staffing level at the plant by more than 30 percent. Bill told me I would not be happy with the changes. He added that employees at Shady Point would feel “uncomfortable” if I were to visit as I had in the past. If I had not been preoccupied with the larger issues of maintaining our corporate values, I might have rejected Bill’s request. I felt hurt and humiliated, but at the time I had bigger problems. I was fighting with the board to preserve our values—and to keep my job. Instead, I told people in AES I had been “fired” from the plant. I did not meet with the Shady Point managers for over six months, and even then we conferred “off campus.” When I finally visited the plant a month after that, I was greeted by cheers. It was one of the sweetest moments of my career.
In the six months following the stock price decline, there was considerable pressure from some board members and officers to “tone down the rhetoric” about values. Several of them thought it arrogant of us to talk about values in public when we didn’t always practice them. “Investors would not treat us so harshly if we didn’t put the values out front so much and then fail to live them,” said one board member. Besides, profits—not values—were what investors cared about, so “let’s not talk about values outside the company,” another board member said. The issue of why we put so much emphasis on values was raised again. “They didn’t work, Dennis. We need to adjust,” is the way one of my associates put it. We engaged in lengthy discussions about whether we should change the way the company described the relationship between values and profits in our public-offering documents. During this time I felt under-appreciated and uncertain about how much support I had among board members, who seemed to like our values only because they generated good press and were popular among employees. I felt I was alone in fighting for our values because they were intrinsically right.
All of this put an enormous strain on the relationship between Roger and me. We spent most of a day at his home discussing what to do. The board had lost confidence in me and my leadership approach. (I believe Roger had, too.) Should we split the company? Should one of us quit? He wasn’t having fun and neither was I. I told him I wanted to stay and make the company work. We decided that I would visit all the board members who had been with the company since the beginning. I would apologize for what had happened and ask them to give me another chance to show that I could lead the company in a way that would make them proud.
One of the things I learned from this experience was that I had done a terrible job teaching people our values and principles. As a company, we did not understand in a practical way how those values shaped the way we organized our work and life together.